In March of last year the Chinese government officially announced the end of its nine-year state corn procurement program. The aim of the program was to stabilize corn acreage and boost rural incomes. But the program also distorted the market equilibrium, leading to artificially inflated domestic prices and a massive inventory held by the state reserve.
In 2015-16 alone, domestic production exceeded consumption by nearly 80 million tonnes. The government will bear an estimated $10 billion to $15 billion per annum in the coming years, including storage costs, interest subsidies and other fees — and that’s not even considering the inventory write-downs due to falling prices. Rabobank estimates China will register another 30-million-tonne surplus in corn in 2016-17.
A recent analysis of the situation by Rabobank entitled, “Cutting China’s Massive Corn Inventory,” examined the kinds of measures China will take to shrink its inventory and how long this de-inventory process will take.
Rabobank said the process will involve four measures.
The first is switching corn acres to soybeans and other crops. Facing excessive oversupply, the Chinese government plans to reduce corn acreage by 9% by 2020, especially in the so-called “sickle-shape region” — an environmentally fragile, cold, arid, mountainous and eroded area on the fringes of the key corn production regions. With declining corn prices, Rabobank said it expects some farmers to switch to other crops such as soybeans, forage grass, potatoes and coarse grains. These measures come after the government already has encouraged crop rotation in order to improve soil fertility. Rabobank said the planting structure adjustment won’t be accomplished in the next planting season, but that it will take the next few years.
The second measure China is taking is reducing its imports of non-corn feed grains. Although corn imports are protected by quota, China imports a significant amount of alternative feed grains such as sorghum, feed barley and DDGS, Rabobank said.
“It is worth mentioning that China accounts for roughly 20% of global feed grain imports — three-quarters of all sorghum trade, one-third of all barley trade (even though 30% of it is for brewing) and nearly half of U.S. DDGS exports,” Rabobank said. “In 2015, the import volume of sorghum, barley and DDGS were 10.69 million tonnes, 10.73 million tonnes and 6.82 million tonnes, respectively.”
While plummeting corn prices already will reduce the appeal of imported feed grains, the government will still want to pose more protective trade policies, further impeding imports in order to boost domestic corn consumption and to absorb the massive overhang in state reserves, Rabobank said.
China’s slowing demand also will have consequences for exporting countries. Rabobank said a proportion of the feed grains will need to find a different outlet in the world market, and therefore they will be exported to other traditional destinations, while larger volumes also will need to be used in the country of production.
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Expanding ethanol and exports
The other two measures China is taking — expanding its ethanol mandate and increasing exports of corn and corn-based derivatives — will be a bit more challenging, Rabobank said.
Expanding the ethanol mandate is an effective way to absorb excessive corn, as seen in recent years in the United States, where the ethanol sector consumes one-third of the national corn output. However, since crude oil prices are low, the Chinese government will need to either implement mandated quantities that need to be blended into gasoline or to offer a considerably large amount of subsidies to corn processors, Rabobank said.
“On top of that, the milling capacity for ethanol in China is around 30 million tonnes, and the utilization ratio is 50% to 55%,” Rabobank said. “In order to reduce corn stocks significantly through ethanol, more milling plants would need to be established, resulting in high capex investment. And once the large domestic stocks have been lowered, the continuation of grain-based biofuel programs remains a big question mark in China, given the scarcity of land and water in the long run.”
Corn exports may be another potential solution for the fast inventory reduction. China’s neighbors such as Japan, South Korea, Taiwan and Southeast Asia import over 40 million tonnes of corn every year. Rabobank noted that China has the advantage of geographic proximity when it comes to supplying deficit regions. However, owing to the lack of scaled farming, high production costs make it extremely difficult to export without government subsidies, which have the potential to violate WTO rules. Rabobank projects that, instead, China will increasingly export certain types of corn-based derivatives, including — but not limited to — lysine, citric acid, MSG, HFCs and crystalline dextrose. But this can only mitigate the imbalance to a limited extent.
Rabobank said the corn de-inventory process will not be a swift one. Keeping in mind the social stability and long-term food security, the Chinese government also emphasizes the need to keep corn acreage stable in key production areas. In addition, Chinese local farmers need time to change their farming habits. Therefore, domestic corn production is projected to see gradual, but not dramatic, shrinkage in the coming years, Rabobank said.
“Without additional increases in demand, the whole de-inventory procedure could take more than a decade,” Rabobank said.
Rabobank noted that China’s corn policy reforms don’t only have an impact on the domestic market but also on international trade. And the impact will extend beyond corn.
“The slowdown in feed grain demand has a negative influence on leading exporters,” Rabobank said. “Traders need to find alternative outlets to absorb excessive supply, such as exporting to other destinations and increasing usage in the country of production. International trading houses should also monitor China’s corn exports and soybean imports, keeping an eye out for unexpected risks.”
According to the U.S. Department of Agriculture (USDA), China’s corn area harvested increased from 25.4 million hectares in 2004-05 to 38.1 million hectares in 2015-16, a rise of nearly 50%. That number is projected to drop for the first time in 13 years in 2016-17, with the area harvested pegged at 36.7 million hectares.
Likewise, production and consumption are expected to drop in 2016-17 for the first time in 13 years, according to the USDA. Production jumped 73% from 130.2 million tonnes in 2004-05 to 224.6 million tonnes in 2015-16 but is expected to fall to 219.5 million tonnes this year. Consumption peaked at 110.7 million tonnes in 2015-16, a 200% increase over 36.5 million tonnes in 2004-05. That number is projected to drop to 106.3 million tonnes in 2016-17.
Report: China’s corn consumption to drop in 2016-17
China will consume less corn in 2016-17 than previously forecast, according to a report released in December 2016 by the China National Grains and Oils Information Center.
The report said that Chinese farmers are giving their animals more sorghum and barley as overall demand for feed in the country wanes. The Information Center cut its estimate for corn consumption for the season that ends September 2017 to 197 million tonnes, down from its previous forecast of 199 million tonnes.
It noted that while corn consumption by industrial users in China would remain the same as previously forecast, at 63.4 million tonnes, usage in animal feed will drop to 114 million tonnes.
The report said sorghum import estimates for the coming year have risen by 1 million tonnes to 4.5 million tonnes.